LVMH: The Wolf in Cashmere’s Conglomerate

Sector

ConsumerLuxury

Background

Christian Billinger is the chairman of Billinger Förvaltnings. We cover the paradox between scarcity and scale in the luxury industry, analyze some of LVMH's high profile acquisitions, and delve into the history of its maverick CEO.

Cover

Date

August 3, 2022

Episode Number

68

Key Learnings

1. Arnault's success is a result of his strategic vision to consolidate the luxury industry by acquiring family-controlled businesses. By targeting underperforming brands with significant potential and applying his unique business acumen and management strategies, Arnault has been able to generate substantial growth.
2. Maintaining a diverse portfolio of luxury brands allows LVMH to maintain its market dominance and financial stability. While the fashion and leather goods division is the most profitable, diversification across different luxury segments (watches and jewelry) helps LVMH manage risks and take advantage of various growth opportunities in the luxury market.
3. Reinvestment for Long-Term Growth: LVMH has a strategy of consistent reinvestment, operating margins have remained around 20% due to this reinvestment strategy, suggesting a balance between profitability and sustainable growth. LVMH generated a ROIC north of 20% from a deployment of 30 billion euros (both organic and M&A).
4. Succession Planning in Family Businesses: LVMH's potential succession challenge due to its diversity and scale highlights the need for rigorous succession planning in family businesses.
5. Long-Term Investment and Brand Equity: Luxury businesses can provide investors with sustainable returns due to their pricing power and strong brand equity.
6. Consolidation and scale in the luxury industry: The European luxury industry has seen a trend towards consolidation, with conglomerates like LVMH, Kering, and Richemont rising to dominance. This trend points to the importance of scale, especially for family businesses that lack the necessary capital for international expansion.
7. Investing in Value Enhancement: LVMH's acquisitions show how investing in undermanaged yet reputable brands and providing the necessary capital and expertise can result in value enhancement.
8. Importance of Brand Modernization: LVMH's modernization strategy at Rimowa and Tiffany by leveraging celebrity endorsements, showcases how adapting to market trends can breathe new life into a brand
9. Balance of being optimistic long-term while remaining pessimistically cautious short-term to ensure survival: This is done through conservative balance sheet management, portfolio diversification, and continual reinvestment. Secondly, doing what's right for long-term brand equity, even if it's suboptimal in the short-term, is a key lesson, with reference to luxury businesses not relocating their production to low-cost locations, being highly vertically integrated.
10. Importance of Brand Perception in Luxury Segment: One of the potential risks identified for LVMH was the possibility of brands like LV losing their luxury perception due to over-expansion. This highlights the importance of maintaining exclusivity and premium perception in the luxury market.

Key Takeaways and Business Model

1. Bernard Arnault, the founder of LVMH, has built the world's largest luxury business through a strategy of acquiring and professionalizing undermanaged luxury brands. The company now generates €75 billion in sales across its 75 brands with a market cap of €350 billion, making it one of the world's largest businesses.
2. LVMH's most important and profitable division is fashion and leather goods, accounting for nearly 50% of revenues and almost 75% of operating earnings. Louis Vuitton and Dior are the key brands in this division, representing almost 30% of group revenues and nearly 50% of group EBIT. These two brands, especially Louis Vuitton, are crucial for understanding the value and growth outlook of LVMH.
3. Diversification and Scalability: lessened dependency on singular brands differentiates them from competitors. Buying LVMH gives you a luxury index effectively.
4. Leadership and Succession: LVMH's success has been closely tied to Mr. Arnault's role as CEO, given his detail-oriented, demanding approach, and his role in capital allocation. Four of his five children are actively involved in the business, with potential successors in sight, maintaining the family-owned aspect of the enterprise.
5. Pricing power: luxury market, as represented by LVMH, offers significant pricing power due to high brand equity, and this power tends to be sustainable. The majority of LVMH's brands have proven durability, showing resilience in various economic cycles and consumer preference shifts.
6. Capital Reinvestment and Growth: Over a 10-year period leading up to the pandemic, LVMH deployed around 30 billion euros of capital and achieved returns on incremental capital north of 20%, including both organic investments and acquisitions.
7. Robust financial performance: LVMH has shown strong financial resilience, with organic growth averaging ~10% in the ten-year period between the financial crisis and the pandemic. Gross margins in the mid 60s, while operating margins hovered around 20% until 2021. LVMH's Net Debt/EBITDA ~0.4, indicating a conservative financial profile given the business's diversification, track record, and brand strength.
8. Family control and successful conglomerate model: The Arnault family controls about 50% of the capital and a little over 60% of the votes in LVMH, suggesting a strong influence over business decisions.
9. LVMH vs Hermes: LVMH has notably differentiated itself from its peers, such as Hermès, with its aggressive growth strategy and focus on building the business, compared to Hermès's organic development and product-focused approach.
10. Strategic M&A to amplify brand growth: LVMH historically purchases well-established brands, notably Bulgari and Tiffany, where they believe they can enhance value. For example, when LVMH acquired Bulgari for EUR4b, the brand was under 100m EBIT on sales of just over a billion. By 2019, after optimizing the business structure and retail experience, Bulgari was generating 0.5b of EBIT on 3b sales.
11. Revitalization and Modernization Approach: LVMH often revitalizes and modernizes its acquired brands, making them more appealing to a younger demographic. The brand's transformation can be seen in Rimowa, where the company leveraged collaborations with celebrities and brand ambassadors to modernize the image.
12. Potential Vulnerabilities in LVMH: These include the growth paradox where growing brands like LV might lose their luxury perception, the inherent complexity of the sprawling business that could become a challenge or a burden post-Arnault's succession, potential problems with selling underperforming businesses, and possible changes in the Chinese market

Transcript